The State Bar of California has approved the establishment of a task force to consider amending ethics rules that limit ownership of legal services companies to lawyers.
While any changes would be a long way off, the task force will come at a time when a growing chorus of reformers say that allowing outside investors to finance the delivery of legal services could lower the often prohibitive price of obtaining a lawyer’s advice. Liberalizing the restrictions on nonlawyer ownership of legal services companies also could lead to more innovation in the corporate legal market, many professors and lawyers believe.
The formation of a task force comes after the California bar commissioned William Henderson, a professor at the Indiana University Maurer School of Law, to prepare a study of the current legal market landscape.
In his report released Friday, Henderson, a well-known legal industry expert and surveyor of innovation in the legal businesses, said the profession’s restriction on outside investors has hindered the creation of new solutions needed by corporate clients while making the cost of personal legal services prohibitive to about 90 percent of the population.
“The legal profession is at an inflection point that requires action by regulators,” wrote Henderson, adding that “the ideal” would be to allow lawyers and other professionals to work as “co-equals” in legal service organizations. “Some U.S. jurisdiction needs to go first. Based on historical precedent, the most likely jurisdiction is California,” Henderson said.
The report issued to the state bar board of trustees said the staff recommended that the board approve a task force to consider Henderson’s report and to study possible regulatory reforms “including but not limited to the online delivery of legal services, that balance the State Bar’s dual goals of public protection and increased access to justice.”
Henderson and a spokesman for the California State Bar said the proposal for the task force was approved on Friday. The task force’s work must be completed by the end of 2019, the spokesman said.
In a blog post about his report on a website he co-founded, Henderson said he made no predictions about what the California bar would do following its submission to the board of trustees. In an interview, Henderson said his role in preparing the report was not to necessarily voice an opinion, but to document the facts about the current legal market.
“I think the facts point in the direction of liberalizing the rules, and somebody needs to say that,” Henderson said.
The report states that one of the legal profession’s main problems is lagging productivity. As other businesses and professions have become more productive, thanks to technology and other innovations, the legal profession remains largely stuck as a highly human-intensive business. As a result, lawyers have the power to raise their prices.
But Henderson points out that, unlike similar industries that rely heavily on people—such as higher education and health care—the share of U.S. spending on legal services relative to other goods has declined in recent decades.
In 1987, for example, spending on legal services comprised .435 percent of the basket of goods that make up the consumer price index. In 2016, that number had fallen nearly 44 percent, to .245 percent of Americans’ spending. Medical care, despite seeing price increases like the legal profession, has increased its share of spending by nearly 78 percent during that same timespan.
Henderson said consumers have avoided legal services because of the high price. Legal services to individuals declined more than 10 percent (nearly $7 billion) between 2007 and 2011, according to his report to the California bar. Corporate clients, meanwhile, have shifted much of their spending from law firms to in-house lawyers.
“As a sizable portion of the public struggles to afford a lawyer and a sizable portion of the bar struggles to find sufficient fee-paying client work, legal regulators need to seriously evaluate whether the consumer protection benefits of these ethics rules are worth the cost,” states Henderson in his report.
Henderson said that state bar bans on nonlawyer ownership remain “a roadblock to solving, or mitigating, the lagging legal productivity problem.” The efficiency gains from lawyer specialization, which gave rise to law firms, “have been fully exhausted,” he states in his report.
“To foster innovation, the ideal would be to have lawyers and allied professionals working together as co-equals within the same legal service organization,” Henderson wrote.
While his report does not go into details as to how such an organization would create less-expensive legal services, it does note that alternative legal service providers such as Axiom LLC and UnitedLex Corp. have found some success, they remain limited to high volume and repetitive work.
The American Lawyer reported last week on a structure proposed by litigation funder Burford Capital Ltd. to finance law firms’ back-office functions in a creative way to give partners permanent equity in those businesses. Still, it is hard to predict just how revolutionary a repeal or amendment of Rule 5.4, which governs a lawyers’ professional independence, would be for the legal profession writ large.
“The law should not be regulated to protect the 10 percent of consumers who can afford legal services while ignoring the 90 percent who lack the ability to pay,” Henderson said. “This is too big a gap to fill through a renewed commitment to pro bono. This is a structural problem rooted in lagging legal productivity that requires changes in how the market is regulated.”